Look Who’s Buying Gold

Today’s Daily Reckoning is brought to you by Greece, gold, and absurdity. I’ll start with Greece and end with gold. Absurdity makes an appearance in the middle. Make sure you read to the end as you’ll get a better understanding of where the real value and opportunity is in this market, and see who is taking advantage of it now. Hint: it’s not in bank stocks.

Actually, on reflection absurdity permeates nearly every topic in finance these days. The situation in Greece is absurd. The Eurocrats are trying to bluff Greece into sticking with the ‘bailout’ program. They said the deadline to accept the terms was 16 February. That was last night our time.

Greece told them the idea of extending the bailout agreement was ‘absurd’. The talks ‘collapsed’, and another deadline in Europe expired with nothing achieved or resolved.

Europe’s creditors are playing hardball, but to no avail. They will have to compromise or things could get very ugly. This impasse is clearly good news for markets. They’ve barely noticed the fact that the euro project is under threat. Stocks just keep going up.

The absurdity is not limited to Europe though.

Yesterday, Japanese economic growth numbers for the three months to December showed the economy grew at an annualised pace of just 2.2%, which was well below expectations.

Japan clearly isn’t printing enough!

As usual, the stock market rejoiced in weaker than expected economic growth, which, incidentally, turned out to be zero per cent for all of 2014. From the Financial Times:

‘…the stock market shrugged off the GDP figures, as deflationary pressures around the globe raise the prospect of looser monetary policy for longer — including from the Bank of Japan, which meets this week.

‘The Nikkei 225 touched an eight-year high and closed up 0.5 per cent at 18,005.’

Deflationary pressures?! The Nikkei is at an all-time high. The S&P 500 and Dow Jones Industrials are at an all time high. The German market, the Dax, is at an all-time high.

Bond yields around the globe are at the lowest levels in history…or if not then certainly at the lowest levels in a generation or more. Record low bond yields mean record high prices.

Property prices in many developed nations, not just Australia, are at record highs too.

Where is this scourge of deflation that the media so slavishly refer to on a daily basis? All I can see is asset price inflation everywhere. Commodity prices might be falling, but it’s not exactly translating into a cheaper cost of living.

Mainstream journalism has become an elaborate PR machine for the world’s oligarchs.

‘Oooh, central bankers are working very hard to deal with the evils of deflation, so we must back them 100% in their endeavours…despite the fact we have yet to see this deflation bogey ourselves. Still, it is our duty not to question but to pass on this concern to the simple public that read our publications.’

As a result, everyone’s got it in for deflation when the truth of the matter is that it’s an innocent bystander in all this.

Look, let me give it to you straight. Deflation is not the problem here. Not even the threat of it. The problem is excessive debt levels. Like Tom Cruise’s character in A Few Good Men, excessive debt can’t handle deflation. It just can’t cope with it.

But because excessive debt is directly due to governments that borrow and spend, and the central banks that facilitate this spending, then it’s clearly not going to get the blame. Deflation is the scapegoat.

A few weeks ago McKinsey released a detailed report showing how debt levels had increased around the globe by US$57 trillion since 2007, and that:

‘A large body of academic research shows that high debt is associated with slower GDP growth and higher risk of financial crises. Given the magnitude of the 2008 financial crisis, it is a surprise, then, that no major economies and only five developing economies have reduced the ratio of debt to GDP in the ‘real economy’ (households, non-financial corporations, and governments, and excluding financial-sector debt). In contrast, 14 countries have increased their total debt-to-GDP ratios by more than 50 percentage points.’

Deflation is not the cause of the problem here. It’s a symptom of having too much debt. The more that the fools in charge try to ‘fight’ deflation by increasing debt levels, the nastier the eventual deflation will become.

In the meantime, what do you do with your money? Plough it into the banks, which are all hitting record highs?

If you’re in the banks already, you can probably afford to hang around for a while. Most bank stocks are breaking out to new all-time highs, which is generally a bullish sign that more gains are in store. But as I wrote yesterday…have an exit plan.

That means having stop loss levels in place. These are pre-determined levels designed to get you out of a stock when the trend changes. Right now, the long term trend for the banks is bullish and there’s no evidence that is going to change yet. But as the saying goes, jumping on the bank bandwagon now is like picking up pennies in front of a steamroller. Be nimble.

If you want to make big returns, you need to look where no one else is. Recently, I’ve been talking about gold stocks as being a very interesting investment proposition at this point.

They’ve been in a bear market for the past three years and the sector has endured a 70-80% decline in that time. In short, it’s been ugly and investors have turned their back on gold.

Being a tentative bull, I was interested to see this headline in the afr.com yesterday:

‘North American private equity firms hunt ASX gold companies’

Private equity funds are hit and miss. They’ve become mainstream over the past few decade and their ideas don’t always work out. But at the smaller end, they tend to be very effective at sniffing out a bargain and a long term opportunity.

The article quotes a resources advisory source from Perth:

‘"Private equity recognise that resources in the ground, and gold in particular, are very much undervalued at the moment and are due for a re-rating," he said.

‘"Projects here are trading at $4 to $10 an ounce, that in a normal market you would expect to be $50 to $60 an ounce."’

This matches with what I’m seeing across the gold sector in general. The Aussie dollar gold price has jumped due to the fall in the Aussie dollar against the greenback. This means that our miners are much more profitable than they were six or eight months ago.

The sector is extremely cheap, with many stocks trading on just two or three times expected earnings. This means the market is either simply ignoring the opportunity or thinks that gold is going back to new lows.

Maybe gold will resume its bear market, no one knows for sure. But if you’re a contrarian and want to get into a sector BEFORE it becomes popular you have to take a risk. And right now, the risk/reward opportunities I’m seeing in the gold sector are looking very attractive indeed.

So much so that I’m putting together a special report on gold and hope to have it to you by the weekend. So keep your eye out for it. Not everything in the investment world is an absurd proposition.

Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market.
To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.

Leave a Reply

Be the First to Comment!

Connect with:

Notify of

Notify of new replies to this comment

Notify of new replies to this comment

Letters will be edited for clarity, punctuation, spelling and length.
Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au

Follow us on

Testimonial

Just thought I would let you know that whilst I receive countless financial emails daily I view yours as something special. I am not looking for the same old humdrum I am looking for news that is out of left field. Now you guys would be off the planet if you went any further left but it is refreshingly different. I get through the humdrum first and get my mind sorted and save you for last as a check. It is certainly an insane moment in time but I am still finding investment opportunities. Thanks for your comments